Confidentiality Agreement

When a sale of a business is being negotiated, it is standard practice that both the purchaser and the vendor enter into a confidentiality agreement. This is also known as a non-disclosure agreement (NDA).

Before signing the contract of sale, a vendor will typically provide prospective purchasers with confidential information on business operations. This will enable a purchaser to determine whether to purchase the business. To protect this confidential information, both parties need to sign a confidentiality agreement. This article will outline the importance of confidentiality agreements, and the key points which should be included.

 

When Should Parties Enter into a Confidentiality Agreement?

The purchaser and vendor should enter into a confidentiality agreement before the vendor provides information for the due diligence process; or

 

What Should be Included in a Confidentiality Agreement?

A confidentiality agreement must be tailored to suit the individual circumstances of the particular sale. If parties are seeking to utilise an NDA template, it is always important to review the terms to ensure that they are appropriate for the particular transaction.

 

Who should be the parties to a confidentiality agreement?

The parties to the confidentiality agreement will be the purchaser and the vendor. It may also be necessary for the key advisors of the Purchaser to be a party. Also, if the Purchaser is a company the agreement may also need to be signed by the directors of the Purchaser company. That way the directors are also legally bound by all the terms of a confidentiality agreement.

 

Purpose of the Agreement

In a confidentiality agreement, the purpose section will outline what are the permitted uses of the confidential information, as well as who is permitted to receive that information.

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Exceptions to the Agreement

The parties to the confidentiality agreement are barred from disclosing the confidential information that has been provided during the negotiations, except:

  • To permitted persons that have expressly been named in the confidentiality agreement; or
  • Where the confidentiality agreement specifically states that that information is not included.

Permitted Persons

Permitted persons will generally be close professional associates of the purchaser who assist in the review of the confidential information. These may include:

  • Employees;
  • Agents/Officers;
  • Directors/Managers/Senior employees; and
  • Professional advisors such as accountants or lawyers.

Depending on the circumstances, there may also be other persons/groups that are regarded as ‘permitted persons’ for the purposes of the confidentiality agreement.

If there is highly sensitive information exchanged, the vendor may require that each permitted person signs a separate confidentiality agreement. This ensures a personal obligation to not disclose confidential information.

Categories of Information that are Excluded

The confidentiality agreement may make allowances for certain categories of information to not be subject to the agreement’s obligations. This means that if this information is disclosed, this will not be a breach of the confidentiality agreement.

Some examples of this include:

  • Information that is already public knowledge;
  • Information that has been lawfully gained before signing the confidentiality agreement; and

Prohibition of Public Announcements

Generally, before negotiations and the transaction have been completed, both parties will want to prohibit the making of public announcements. This is important to prevent any potential negative impacts on customers, employees and suppliers of both parties.

Restraint of Trade/Non-Competition

Confidentiality agreements may also contain restraint clauses that prevent the purchaser from:

  • Soliciting the services of crucial employees of the vendor; and
  • Dealing with major customers or suppliers of the Vendor.

Such clauses are particularly important to include if one of the parties is either a competitor or is likely to become one, to the person disclosing the confidential information.

The requirement to Destroy Information

The party disclosing the information may also require the purchaser to destroy the confidential information/documents they received if the sale does not go ahead. The purchaser will need to destroy both physical and electronic copies of confidential documents.

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Sunset Clause

The confidentiality agreement should also state when the obligation of confidentiality will cease. That is, how long the information cannot be disclosed to persons outside the agreement. The vendor will typically seek a longer confidentiality period, but generally, this does not exceed 1 or 2 years from the agreement being signed. Depending on the type of transaction, the confidentiality agreement may terminate if a sale is negotiated.

Consequences of Agreement is Breached

If there is a breach of the confidentiality agreement, the agreement should outline some of the possible measures that the aggrieved party can take including applying for an injunction.

Key Takeaways

  • Before the commencement of negotiations for the sale of a business, it is crucial to execute a tailored confidentiality agreement between the purchaser and vendor.
  • Several crucial elements should be included in confidentiality agreements, including clearly outlining the parties, purpose/s and consequences of a breach.

About us

If you are entering into a business sale transaction and have any questions, or need a specialist commercial lawyer, feel free to contact Lord Commercial Lawyers on (03) 9600 0162, email us at info@lordlaw.com.au or fill out the form on this page.

For further information please visit our page on Intellectual Property.
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By Andrew Lord

Director
Andrew heads Lord Commercial Lawyers as Director and has been in the Legal Industry for over 40 years.

Updated on May 16, 2024

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